The sour taste from the 38 Studios bond financing fiasco has eroded support for needed economic development projects in Rhode Island, according to a
San Diego-based Gurtin also said Rhode Island's serious financial challenges extend well beyond the headline 38 Studios controversy.
According to Gurtin, the state's economic and demographic trends remain poor, its smallness and geography present "unique challenges" and it relies too much on gambling revenues as a cure-all.
The demise of video-game company 38 Studios left state taxpayers on the hook for $75 million in moral-obligation debt a state agency backstopped in 2010. 38 Studios, owned by former Boston Red Sox pitcher Curt Schilling, folded two years afterward.
Skepticism over economic development initiatives "is unfortunate for a state so in need of economic development," said Michael Johnson, Gurtin's co-chief investment officer, managing partner and head of research.
"Investors should now seriously question the state's moral obligation and should dig deep into bonds financing certain types of economic development," Johnson added.
State officials are weighing a proposal by the new ownership of the Pawtucket Red Sox to build a 10,000-seat stadium for the minor-league baseball team on vacated Interstate 195 land near downtown Providence. The team is asking $4 million a year from Rhode Island taxpayers.
Gurtin placed a sell rating on Rhode Island bonds in May 2014 and said it has no exposure to state debt for its clients.
"Reports such as this one are precisely why Gov. [Gina] Raimondo proposed a comprehensive jobs plan to create thousands of good jobs over the next few years--putting cranes in the sky, making it easier and less expensive for companies to invest in Rhode Island, and training Rhode Island workers to compete in the global economy," the governor's press secretary, Marie Aberger, said in a statement.
"Importantly, her plan invests in a number of economic tools to make us competitive with our neighboring states and help us attract businesses and grow jobs, while making progress towards closing a $190 million deficit. These initiatives are what is needed to change Rhode Island's course and set our state on a path of sustainability and opportunity."
Raimondo, who took office in January after four years as general treasurer, has called on Rhode Island to revive its sagging economy. It has one of the nation's highest unemployment rates. Last month she proposed an $8.63 billion fiscal 2016 budget to state lawmakers. The spending plan acknowledges a $190 million deficit.
The budget includes a full appropriation - about $12 million -- for the controversial 38 Studios debt. In 2010 the Rhode Island Economic Development Corp. issued the $75 million loan and backed it with the state's moral obligation. Lawmakers the past two years approved payments, though after heated debate.
"Given the debt's highly contentious history, we remain concerned that due to the expectations of ongoing fiscal woes, the legislature will continue to search for opportunities to reduce expenditures and, as such, the 38 Studios appropriation will remain an issue for the foreseeable future," said the Gurtin report.
Moody's Investors Service, Standard & Poor's and Fitch Ratings have said that the moral obligation debt is tantamount to general obligation. Moody's rates Rhode Island GOs Aa2, while Fitch and S&P rate them AA.
According to Johnson, pension and Medicaid initiatives by Raimondo are of heightened interest. Rhode Island earlier this month reached a compromise that with state legislative approval would settle a lawsuit by unions challenging the landmark 2011 law that cut pension benefits. Three union groups remain opposed to the deal brokered by Rhode Island Superior Court special master and former state Supreme Court chief justice Frank Williams, though Raimondo in announcing the agreement said unanimous signoff was not necessary.
"The state has made some progress on pensions, but there is still some union negotiations that need to happen in addition to the implementation, which is not insignificant," said Johnson. "The governor has commissioned an advisory group to look at the state's delivery of Medicaid. Given that Rhode Island has the second highest cost per enrollee in the nation, it stands to reason that there could be some cost savings available."
Johnson added, however: "Advisory groups and blue-ribbon panels have a history of having minimal impact, so we will continue to monitor the state's progress."
The Gurtin report also warned about Rhode Island's overreliance on gambling revenue. This week the new owners of Twin River Casino in Lincoln, R.I., proposed moving the Newport Grand casino to Tiverton, R.I., near the Massachusetts line, and expanding its offerings to counter the Bay State's casino buildup.
"The same silver bullet each year ... is becoming increasingly unreliable," said the report. In fiscal 2014, said Gurtin, gambling accounted for 11% of all state revenues, placing Rhode Island second only to Nevada.
Being the smallest state doesn't help Rhode Island either, said the report, which noted that lawmakers must monitor tax rates in neighboring states.
"In Rhode Island, this factor is magnified since citizens can easily move an hour in any direction and become a resident of another state with lower tax rates without drastically altering their lifestyle," said Gurtin.
